The Impacts of Risk on Procurement

Procurement is arguably the most exposed element of a company, since it is involved in the supply of resources that are critical to the end products and services of a business. This means procurement officers are likely to experience different types of risk, the consequences of which may significantly impact their operations and the success of the overall business. It is important then to understand and categorize risks while discussing ways to address them. How does risk impact a procurement operation? When can addressing risk help your operation? When do you have to bite the bullet and address thorny risk? This piece seeks to answer those questions after detailing risk as it pertains to procurement.

Risks And Their Impacts On Procurement

Risk is defined as an exposure to danger or a potential loss. With regard to procurement, risk impacts supply and spend for the organization. There are several specific types of risk that are top of mind for procurement executives, as highlighted by Consero’s recent survey of that audience. For example, procurement officers experience cyber risk (piracy and data insecurity), slow speed of supply, poor business practices, and potential climate risks. As a procurement operation expands to other parts of the world, the procurement officer may grapple with additional types of risks. Enhanced climate or geographic risk is increasingly a concern. The most apparent risk in many regions is political instability—for example in the Middle East and Africa. Human rights issues such as slavery and unreliable transportation may impact where a company wishes to expand. Certain countries may have less stringent laws that enhance the problems associated with the general risks mentioned above.

Each risk impacts the business in specific ways. Cyber risk often makes patents and other pieces of important information insecure. Competitors may use compromised proprietary information to cut into your market. Key stakeholders are worried by security gaps; a leaked piece of data could mean a serious financial loss, which directly impacts brand and a CPO’s access to certain funds. In the end, cyber risk may endanger the supply base.

Slow speed of supply seems to be intrinsic to a procurement officer’s risk portfolio.

Slow speed of supply seems to be intrinsic to a procurement officer’s risk portfolio, as supported by the Consero survey, which placed supplier risk at the top of concerns for procurement officers. If receipt of a product is time sensitive, slow supply may be catastrophic—particularly for the procurement officer, who tends to be liable for such problems. Slow supply may also add to costs, requiring extra staffing to work with or replace a troubled supplier.

Poor business practices within suppliers are manifested in many ways. Nepotism or cronyism at a supplier or in your business may place the wrong person in too high of a position. In certain areas, bribery is an expected part of certain business deals that raise ethical qualms for many companies. Collusion from the supply side is another risk faced by procurement officers. If suppliers, whether private or a government, collude to raise prices, then the procurement officer is likely to feel the financial pinch from that end and, correspondingly, from executives within the firm.

Problems unique to a specific region or country can have a dramatic impact on a procurement operation. Political volatility tends to result in inconsistent regulations and poor protections that companies rely on to ensure procurement stability. If a country has historically biased regulations that favor domestic companies, brand, cyber, and corruption risks may be exacerbated. Climate risks are also aggravated in these politically unstable areas. In particular, procurement operations that tend to rely on farming and resource extraction in these areas could see the risk of falling production in coming years.

When To Embrace Risk

Working with risk is something that all executives must do. However, understanding and capitalizing on risk may help an executive be more effective. Certain risks are always found in the procurement industry, while others must be addressed on a case-by-case basis when they arise. This section is designed to help procurement officers understand when they should work with risks to change their department or business.

Supplier risk is among the most routine problems faced by procurement officers. While this risk is a headache, it can certainly be addressed when one fully assesses the problem and lays foundation for risk management. It is important to anticipate and start addressing issues before they arise.

It is important to anticipate and start addressing issues before they arise.

For example, if a CPO believes that his or her department is understaffed, which inhibits effective supplier management, it is important to flag the issue early and forecast the potential impact of failing to fix the issue.

By raising issues before a crisis occurs, CPOs can not only cover themselves in the event their warnings go unheeded, but they can control the dialogue more effectively than they could mid-crisis, and they can also showcase competency in risk mitigation.

Regulatory risk is one a company can always anticipate. Not complying with regulations can result in fines or other punitive measures and tarnishes the organization’s reputation. A company should develop processes that allow it to stay ahead of the regulatory game. An example is interacting directly with the regulator, allowing you to develop a core competency on what the regulator is expecting. From there, the procurement officer should build a team, perhaps with the legal function, that allows him or her to identify and respond to regulations. Such practices may require investment, but they could very well save a lot of money in the future. Understanding the regulatory game may allow you to predict the next potential wave of regulations, meaning you can stay ahead of the curve.

Cyber security and product/brand risks are increasingly important areas of concern for the procurement world, combining to be close to 30 percent of procurement officers’ top concerns, according to Consero’s recent procurement survey. For cyber security, it is important to realize that not everything can be secured in today’s world. As such, it is important to prioritize resources to protect what is confidential or extremely important to your business versus what does not need as much protection.

This strategy allows those who are hired to protect the most critical material to focus their resources more effectively, which will help the company avoid taking a hit from a potential cyber attack. By implementing this framework, the procurement department will display competency and readiness to address the issues that may cause the most harm to the business.

When To Acknowledge And Address Risk

Many risks need to be addressed in order for the procurement operation to function smoothly. However, not all risks can be managed fully by the procurement department or its staff. This section will detail those most challenging risks and ways to address them best so you can continue to operate effectively.

Corruption is a key aspect of risk that may serve as a barrier to entering into a particular market to procure goods and services. Certain types of corruption may lead to inefficiency if you do not play along. For instance, bribing officials or business partners in the form of a “gift” may be frowned upon in some countries but accepted in others. As such, paying the bribe allows the company to expand to a new market or build upon an existing presence. Depending on the situation, working with a specific corrupt system may be illegal in your home country. In such cases, stay away from the illicit activity and explore more ethical options.

Some cases of supplier risk must be accepted by your business even if it causes problems. For example, a supplier may hold a monopoly on the market, making a change to another supplier virtually impossible. In the short term, you can try to force the supplier to make some changes or lower the cost of the service when negotiating for a new contract. Tell them how their current inadequacies as a supplier hamper your brand. If consumer demand for your company’s product decreases as a result, the chain reaction from your company to the supplier may affect the supplier’s profitability.

In the long term, exploring new regions that have a diversified supply base can help you to move away from the problem gradually.

In the long term, exploring new regions that have a diversified supply base can help you to move away from the problem gradually. Political instability of a market is a top risk in the era of globalization. As companies consider new markets for expansion, whether to enter an unstable region is often a topic of much debate.

Whether to enter an unstable region is often a topic of much debate.

On one hand, suppliers are likely to be cheaper, resulting in a decrease of input costs. However, there is always a chance the region becomes politically or economically chaotic. Given this dilemma, the decision may be made easier by better understanding the stage of political changes in a country. Obviously, the worst time to expand into a region is when the country is on the verge of or has started a political revolution. However, once a new government takes hold and has proven itself to be stable, this is a good sign that there is enough calm for the business to expand to the market, as well as that the country is truly open for business. Several years after a major period of instability, countries typically begin looking for investment, and the regime may have enough political capital to back up an economic guarantee. A good example of this trend is Iran. A few years ago, the country elected a moderate regime that has since worked with global powers on an historic nuclear deal. If the deal is enacted, then the country will open up to more trade. Some years from now, Iran may become a desirable market for U.S. companies.

Conclusion

Risk is inherent in any business. The smart executive is someone who knows how to pursue a risky venture and come out ahead. That being said, some risk, if not effectively addressed, can significantly hamper your department or the entire business. As such, all types of risk need to be identified and assessed fully before making an important decision. When a plan is developed to overcome risk, implement the strategy proactively. By tackling risk early and head on, the procurement operation will be in a stronger position to deliver excellent results for the business.